MACD Quick Summary
Trading with MACD indicator includes the following signals:
MACD is the simplest and very reliable indicators used by many Forex traders.
It calculates and displays the difference between the two moving averages at any time. As the market moves, moving averages move with it, widening (diverging) when the market is trending and moving closer (converging) when the market is slowing down and possibility of a trend change arise.
Basics behind MACD indicator
Standard indicator settings for MACD (12, 26, 9) are used in many trading systems, and these are the setting that MACD developer Gerald Appel has found to be the most suitable for both faster and slower moving markets. In order to get a more responsive and faster performance from MACD one can can experiment with lowering MACD settings to, for example, MACD (6, 12, 5), MACD (7, 10, 5), MACD (5, 13, 8) etc.
MACD indicator is based on Moving Averages in their simplest form. MACD measures the difference between faster and slower moving average: 12 EMA and 26 EMA (standard).
MACD line is created when longer Moving Average is subtracted from shorter Moving Average. As a result a momentum oscillator is created that oscillates above and below zero and has no lower or upper limits. MACD also has a Trigger line. Combined in a simple lines crossover strategy, MACD line and trigger line crossover outperforms EMAs crossover.
Besides being early on crossovers MACD also is able to display where the chart EMAs have crossed: when MACD (12, 26, 9) flips over its zero line, if indicates that 12 EMA and 26 EMA on the chart have crossed.
How does MACD indicator work
If to take 26 EMA and imagine that it is a flat line, then the distance between this line and 12 EMA would represent the distance from MACD line to indicator's zero line.
MACD histogram measures the distance between MACD line and MACD trigger line.
MACD indicator Formula
MACD = EMA(Close)period1 - EMA(Close)period2
The following are the steps to calculate MACD
1. Calculate the 12-days EMA of closing price
Formula for EMA
EMA = (SC X (CP - PE)) + PE
SC = Smoothing Constant (Number of days)
Trading MACD Divergence
MACD indicator is famous for its MACD Divergence trading method.
Divergence is found by comparing price shifts on the chart and MACD values.
Opposite will be true for Buyers.
How to trade MACD Divergence
When MACD line (on our screenshot it is a blue line) crosses Signal line (red dotted line) - we have a point (top or bottom) to evaluate. With two most recent MACD line tops or bottoms find corresponding tops/bottoms on the price chart. Connect MACD tops/bottoms and chart tops/bottoms.
With MACD divergence spotted Enter the market when MACD line crosses over its zero point.
MACD divergence trading method used not only to predict trend turning points, but also for trend confirmation. A current trend has high potentials to continue unchanged in case no divergence between MACD and price was established after most recent tops/bottoms evaluation.
MACD divergence explained
MACD for MT4 collection
MACD_Crossover_Alert.ex4 (Right click + Save as...)
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